Here’s a top 10 list of my most notable observations from the Executive Forum at the Optical Fiber Conference in Anaheim last Monday.

1. When the Carrier panelists (Verizon, AT&T, BT) spoke of SONET/SDH they used the past tense. “When we used to build a SONET/SDH ring”. They appear to have subconsciously moved on.
2. According to Ryan Limaye from Goldman Sachs, Sanford Bernstein issued a report analyzing what would happen to the Telcos if they became a dumb pipe. The result? Much smaller but more financially efficient companies with a better return on equity. All of the carriers with the exception of British Telecom were not open to the idea of being a dumb pipe.
3. Observation: Equipment guys are asking for 40Gb/s components, and component vendors are giving them the finger. The fact that component vendors no longer allow equipment vendors to outsource R&D with a low ROI is a very positive development for this business. People are finally saying no.
4. 40Gb/s demand pressure is from carriers who deployed the Cisco CRS-1 router and need something to hook it up to. Stephen Carlton from Fujitsu kicks in that 40G muxponders make up the other 50% of demand. Many speculate 40G will be bypassed altogether in favor of 100Gb/s Ethernet using new modulation schemes.
5. Jerry Rawls from Finisar (FNSR) - “It is impossible to deliver the level of R&D expected by customers given current margin levels”. “Custom Tweaked Requirements are hard coded into the Telecom psyche and may be impossible to remove”.
6. Fariba Danesh from Avago (private) - ”Finisar pricing is making things difficult for us” (I didn’t get a precise quote… but this definitely was the jist).
7. Jo Major from Avanex (AVNX) – “Huawei still tends to buy at the component level.” Something I’ve covered in depth (see Dr. Strangelove, Or: How I learned to stop worrying and love Huawei)
8. Mike Nishiguchi from ExceLight – “Optical Modules are footprint compatible but the components that go into them are not. Why? We should think about this.” On outsourcing (heavily paraphrased): “The Japanese are not good at giving people titles and job descriptions. This is because they are not good at partitioning responsibility. And this is why I believe Japanese companies are not good at outsourcing their manufacturing”.
9. Gary Wiseman from Intel (INTC) Promises $150 SFP+ module in 2008. Claims 10G-BaseT will be delayed due to 2.5us latency, 6W of power, and new cabling. He clearly wants to keep copper interconnect out of 10Gb/s.
10. Stephen Carlton from Fujitsu (FJTSY) – “Don’t design your network for Video because much bigger drivers exist in the near future. Japan is trailblazing these applications with a cashless society, hyper-mobility, and other application innovation. Their greatest lead isn’t in FTTH, it is in application innovation.” Example: Take a photo of your sushi and your mobile will tell you when it was caught and what boat it came from. Stephen’s comments were unique and a refreshing break from the “Video Broadband Explosion” cited again and again by many talking heads.

Many of these quotes are paraphrased though I feel I captured the intent of the speaker. If I did not, please speak up. Some of these topics have follow up articles that I may release publicly.

Full disclosure: I am long Finisar.

There is one exception to my stereotype. British Telecom’s (BT) 21st Century (21CN) initiative. No Victorian Bric-a-Brac here.

I’ve spent some time ripping apart BT21CN in order to understand the short and long term impact on the telecom equipment and component supply chain. So far, I really like what I see.

There is a ton of information on 21CN in the public domain. BT has stated transparency is an important characteristic of this initiative and it shows. The 21CN website is a good place to start.

MSAN – King of the Ring

Most impressive is BT’s commitment to take all voice and data services at the edge and homogenize them into IP and Ethernet. The star of the show is the MSAN (MultiService Access Node), a DSLAM-on-steroids. All protocol complexity is pushed to the extreme edge of the network and collapsed into the MSAN, which feeds an Ethernet and IP core.

Every voice line is converted to VoIP right where the copper pair is terminated. All 30 million of them. DSL services are provided from the same linecard. BT is using these systems to rollout ADSL2+ to 95% of households nationwide. There’s no separate DSLAM, POTS termination, SONET/SDH Add Drop Mux. MSAN collapses all.

Fractional TDM based Frame Relay and IP services (500k lines!) are packetized and bundled right at the POP. If it isn’t TDM leased line (E1 or bigger), it gets packetized and sent through the core using MPLS. BT has indicated that support for fractional rate leased lines after 2012 is questionable.

The Major Players

Fujitsu (FJTSY) and Huawei provide the MSAN boxes that sit at the edge of the network and act as the bridge between legacy services and an all-IP core, while providing robust support for transporting legacy TDM containers. This is a 40% share of project capex, or $2.8 Billion Dollars.

Speculation was rife several weeks ago that Huawei had lost it’s MSAN contract. I’ve subsequently learned that it is the optical transport contract that Huawei is struggling to keep. Ciena (CIEN) and Huawei are providing the optical transport equipment, though multiple people have informed me that Ciena is capturing a greater share due to problems with the Huawei solution. This is rumor, not fact, so don’t assume it is true.

It certainly was a shock to me, as I have long expected and written about how Huawei will meet initial success in western networks through it’s optical transport equipment. Regardless, I expect the optical transport portion of the contract to be the least important in both strategic and dollar terms. In the near term BT is bootstrapping all of their old transport equipment and not buying a great deal of new kit.

Cisco (CSCO), Lucent/Alcatel (ALA), Siemens (SI), Juniper (JNPR), and most recently Nortel ::ticker(“NT”) supply a motley assortment of switching and routing gear. The picture is murky but it appears to me that, as usual, Cisco wins and everyone else is invited to ensure a decent hand of poker.

Much attention is focused on all the vendors named in the 21CN contract, but the reality is one MSAN vendor is likely to capture at least 1/3 of total capex. It will either be Fujitsu or Huawei. If you have an opinion, please do share.

The Death of TDM Access

Going forward, TDM as an enterprise access technology is over in the UK. BT announced a new contract win with ADVA (ADVOF.PK) to deploy Ethernet demarcation boxes using a multitude of backhaul technologies, mostly fiber and mid-band Ethernet. This is part of their push to roll out Ethernet services.

This is a really big deal. Instead of forcing another copper TDM connection down the throats of their customers (you thought English food was bad) BT will be offering carrier grade Ethernet connectivity, fiber based in some cases.

Anyone betting on Ethernet over PDH or any native TDM as customer connectivity should be concerned. All legacy TDM based Frame Relay and PPP protocols are homogenized into IP right in the MSAN. New customers will be receiving Adva boxes using copper or fiber based Ethernet. It’s safe to assume those E1 lines used for voice will vaporize sometime shortly after.

TDM based optical transport (i.e. SONET/SDH or Ethernet over SONET/SDH) is still used throughout the network to transport both legacy TDM leased lines and IP services.

It is notable that even with a network as radically advanced as BT’s, SONET/SDH still plays a central role, Ethernet over SONET/SDH in particular. Take that, evil anti-SONET Sith Lords. I will fight you to the last.

VoIP 2.0

The other notable characteristic of BT’s architecture is they chose not to rely on TDM to VoIP conversion while using legacy copper TDM termination equipment. This choice, if a trend for other carriers, is death for companies like Sonus (SONS), who provide a solution that bootstraps existing TDM investments. The drawback to their solution is they end up adding more equipment and complexity rather than reducing it.

BT embeds the VoIP functionality right into the MSAN, and does the conversion as close to the customer as possible. This has the effect of reducing, not increasing network elements and is the only long term method for driving down operational costs.

As carriers aggressively deploy low-cost DSL and DSL penetration increases, the MSAN model makes more and more sense. There won’t be legacy TDM connections for Sonus to convert as the edge equipment itself will incorporate this function.

I believe companies like Acme Packet (APKT) are better representative of the long term future of VoIP and other connection based services yet to be invented. Once VoIP is a pervasive service, the growth will be in managing and securing the connections successfully, not converting legacy TDM connections.

Conclusion? Sonus = Carrier VoIP 1.0, Acme Packet = Carrier VoIP 2.0.

Summary

The Victorian age of Telecom is nearing an end, with it’s assortment of bric-a-brac equipment destined for retirement.

BT 21CN is a sleeker, flatter, radically modernistic alternative these Victorian networks of old. If successful, Tech historians will draw parallels between Victorian interior design of the 19th century and Telco Central Offices of the 20th century. More Gropius. Less Cruft.

I could write pages about how much I don’t like England…. somehow the country doesn’t match the fine characteristics of the people who live there.

The author is long Acme Packet.